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Money Smarts
Chapter 6 Money Smarts: The Cost of Credit
When is a bargain not a bargain? Suppose
you buy a jacket that’s on sale. Instead of paying cash,
you use your credit card. If you pay off the balance over
several months, that “sale” is no bargain.
Your interest costs are affected by the
balance of your loan and the length of time you take to pay
off that balance. If your monthly payments are less than your
monthly charges, you may have to make credit card payments
for the rest of your life! By adding a small amount to your
monthly payment and controlling your monthly spending, you
will be able to reduce your interest costs and pay off the
balance.
Go to the BusinessWeek Online
Personal
Finance Credit Cards calculators. Under Credit Card Calculators,
click on “What will it take to pay off my balance?”
Input the following values:
| Amount you owe |
$2,000 |
| Future monthly charges |
$100
(This is the
amount you
expect to
charge on your
credit card
each month.) |
| Future monthly payments |
$45 |
| Interest rate |
12% |
| Annual fee |
$50 |
| Desired months to pay off |
24 |
| Predicted rate changes |
None |
Click on the “get your results”
button and answer the following questions.
- How much in interest costs would you save by paying off
your credit card now? If you want to pay off the balance
in 24 months, what amount should you pay each month? With
monthly charges of $100 and monthly payments of $45, when
will you pay off your credit card?
- Click the INPUTS tab and change your future monthly charges
to $0. How long will it take to pay off the balance on your
credit card?
- Add $10 to your monthly payment. How long will it take
to pay off the balance on your credit card?
- Change your monthly payment to $80. When will you be
debt free?
- Suppose the annual fee is $20. With payments of $80 per
month and no new charges, how long will it take to pay off
the credit card?
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